effective
, 48)]
(48 payments = 12 months/year times 4 years)
NFV = $50
−
+
0134
.
0
1
)
0134
.
0
1
(
48
=
$3337.50
The use of the correct equation (after finding i
effective
) was worth 3 points; the correct answer
was worth 1 point.
Question #2
[15 Points]
You are considering buying office space.
You can buy two small office buildings or one large
office building.
The small buildings cost $1,000,000 apiece and have a resale value of
$1,100,000 apiece after two years.
The large office building costs $2,200,000 and has a resale
value of $2,350,000 after two years.
The purchase of the two small buildings will provide a total
of $40,000 of net income per year.
The purchase of the large office will provide a total of $50,000
of net income per year.
Your MARR is 4%.
On the basis of an internal rate of return comparison,
which option would you choose?
Why?
(Net income is accrued at the end of the year.)
Option
2 Small Buildings
1 Large Building
Initial Cost
$2,000,000
$2,200,000
Yearly Benefit
$40,000
$50,000
Salvage
$2,200,000
$2,350,000
MARR = 4%
2 Small Buildings
:
NPV = 0 = -$2M +
+
+
+
+
+
2
2
1
)
1
(
2
.
2
$
)
1
(
40
$
)
1
(
40
$
i
M
i
k
i
k
NPV is approximately 0 when i = 7%, therefore the
IRR
2small
= 7% > MARR; this is a viable option!
Solving for the IRR = 5 points